Why breaking up with your car insurer is hard to do

Aug. 9, 2014
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A North Lenoir firefighter takes equipment back to the truck after a woman, pinned in her vehicle, was rescued by the jaws of life on U.S. 258 North, May 13, 2014 in Kinston, N.C. / Janet S. Carter, AP

by By Maxime Rieman, NerdWallet

by By Maxime Rieman, NerdWallet

If you've been a loyal auto insurance customer, you may be disappointed to learn that your insurer is thanking you for your business by continually raising your premiums.

Research from NerdWallet, a data-driven, consumer finance website, shows that U.S. drivers overpay on their auto insurance by an average of $368 each year, and that comparison-shopping can save consumers up to 32%.

So why aren't more people shopping around for a better deal? And why do rates continue to rise for loyal, long-term customers?

Several prominent consumer protection groups want to know the answer to those questions, and have called on the insurance industry to change its ways.

Only 15 minutes to compare auto rates? Think again

According to NerdWallet data, auto insurance rates vary 154% on average within a given zip code, so it really does pay to comparison-shop. Unfortunately, most customers surveyed found getting quotes can be time consuming and unpleasant, with only 12% reporting that they found the process easy.

If you listen to industry ads, they paint a very different picture. One well-known auto insurer boasts that it only takes 15 minutes to get a quote. That doesn't seem so bad until you realize that if you spent 15 minutes getting one quote, comparing 10 insurers would take you at least two-and-a-half hours!

Another popular auto insurer provides comparison rates for competitors on its website. But you have to disclose personal information - including your name, address and date of birth - before you can access that information.

The bottom line is that insurers don't do a very good job of making comparison-shopping easy. If it's too much of a bother to get quotes, you'll likely stay loyal to your current insurer. And that's just what your insurance company wants.

Price optimization and how it affects you

You'd probably expect factors that affect the insurer's actuarial risk, such as your accident history, age or number of miles driven annually, to influence your auto insurance premiums. But risk-based factors may not be the only data used to set your rates.

Many insurance companies now use a sophisticated data-mining technique called "price optimization" to set rates just high enough that inertia keeps customers from shopping around. Research found that the longer customers had been with their insurers on average, the greater their savings when they switched, due to all the rate increases they experienced during their loyal years.

While consumer organizations such as the Consumer Federation of America and the Center for Economic Justice have condemned price optimization, this practice continues and will likely become more common over time.

"Price optimization is a new strategy to overcharge Americans who have to buy auto and home insurance, said Bob Hunter, director of insurance for the Consumer Federation of America.

"The tool is nothing less than an end-around critical consumer protection laws that are needed to ensure fair pricing of insurance products," said Hunter, a former Texas Insurance Commissioner, in a March 2014 statement.

Price optimization is used by many other U.S. businesses - including retailing powerhouse Amazon.com - in addition to insurance companies.

But the practice has grown rapidly within the insurance business. A 2013 Earnix survey found that 45% of large insurance companies and 26% of all insurance companies in North America currently optimize prices, with an additional 36% of all companies reporting they plan to adopt this technique in the future. What this means is that given two customers with identical risk profiles, the one who's judged less likely to switch carriers if his rate increases will pay more.

So how does your auto insurer gather all this information about you in the first place?

Actually, you're the one giving it to them. Every time you share information about yourself publicly online, that information is fair game for price-optimization databases. This includes information posted to social media sites, online contests and games you play, as well as your Web browsing and shopping habits. As publicly available information, all this data is legally collected, analyzed and then used to predict your future behavior and spending patterns.

While the details of price-optimization algorithms are carefully guarded secrets, stability may be a trait that counts against you when determining auto premiums. That's because those experiencing fewer changes in their lives are more likely to stay with the same insurer.

A report by McKinsey & Company reveals that life events such as changing jobs, moving to another state or experiencing changing insurance needs were associated with an increased chance of switching auto insurance carriers. The report also found loyalty itself to be a major determining factor in retention probability. Customers turned out to be more likely to remain loyal the longer they stayed with their carrier. A total of 58% of those who switched auto insurers were with their carriers for less than four years. Those who were with their carriers under a year were twice as likely to shop around.

Unless you choose to live completely off the grid, you probably can't hide from price-optimization data collectors. But if you're careful, you can reduce the amount of available public information about you:

· Set social media profiles to "friends only" rather than public, and be careful what you share.

When it comes to auto insurance, nice guys really do finish last. Loyal customers are most likely to see their rates creep up year after year due to price optimization.

Sadly, customers who've been with the same insurance company for 11 years or longer have had so many gradual rate increases that they save an average of $426 on their premiums when they finally do switch. That's well above the already impressive average savings generally enjoyed after changing carriers.

One way to find out for sure is to compare rates and if you find a better deal, tell your insurer you're thinking of switching. If you're immediately offered a price reduction to stay, you can assume your original rates were based on price optimization.

Shop smartly

To outsmart price-optimization strategists and get your best deal, take the time to shop around and talk openly with your insurer about competitive offers. If your carrier knows you're a smart consumer, the company will likely take steps to retain your business.

To help simplify the auto insurance comparison process in all 50 states, NerdWallet's has developed a user-friendly pricing tool. You'll get free comparisons based on zip code and the car you drive without having to share any personal information.